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UK payments infrastructure in need of reform

On July 28, 2016 the Payment Systems Regulator published the final report on its market review into the ownership and competitiveness of infrastructure provision supporting three payment systems – Bacs, Faster Payments Service and LINK.

The PSR concluded that there is “…currently no effective competition in the market for the provision of central infrastructure services for Bacs, FPS and LINK”.

Together with the full report the PSR has released a factsheet summarising the key findings and suggested solutions outlined in the report. The three solutions recommended are:

Enhanced interoperability, including a common international messaging standard, for Bacs and FPS; and

Divestment by the four largest VocaLink shareholder PSPs of their interest in VocaLink – it is noted that the acquisition of VocaLink by MasterCard could address some of the issues identified by the PSR as restricting competition.

Feedback on these proposals is requested by September 22, 2016.

What this means for you

By making these changes, the PSR wishes to open up the provision of infrastructure services to Bacs, FPS and LINK to different infrastructure providers, including international players. It remains to be seen to what extent the solutions proposed by the PSR, if confirmed, will lead to new providers coming forward to bid for this work, and whether they will lead to increased competiveness in the long term.

It will not be possible for some providers to bid to supply these services until the international messaging standard has been agreed and implemented, and existing contracts for infrastructure provision will need to run to term. It is likely to be some time, therefore, before the impacts of the proposals, if confirmed, are felt. The Payments Strategy Forum, the payments industry’s strategy setting vehicle, has been tasked with selecting the appropriate messaging standard. In its proposed strategy, which it is currently consulting on, it has proposed the introduction of ISO20022 within the next 1-3 years. The Payments Strategy Forum consultation on its draft strategy closes on 14 September 2016.

Once the new standard has been confirmed, the payment systems operators will have to implement the new standard, which is likely to be a complex and time-consuming task, although one that at least one of the systems, FPS, has already begun work on. There could be short term impacts of implementing the changes, such as increased costs and there are likely to be concerns around risks to the stability of the systems. The Bank of England, as supervisor of these systems from a financial stability perspective, and the PSR will be keen to see are such risks are managed.

Overall the PSR has taken an interventionist approach with these proposals. However, it looks unlikely that it will be required to flex its muscles in relation to the most interventionist of its proposals, to use its powers to force firms with an interest in a payment system infrastructure provider to divest all or part of that interest. The MasterCard deal, if it proceeds, is likely to mean that the PSR’s concerns, which this proposal was designed to address, are allayed. Nonetheless, the point has been made that the PSR is not afraid to ‘show its teeth’.

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